The long history of equity markets' dismal performance in the final month of the third quarter continues. Despite yesterday's strong gains, the Dow, S&P 500 and Nasdaq lost 0.4%, 0.6% and 0.1%, respectively in the month-to-date timeframe due to uncertainties related to the rate hike path and oil price movement.
Meanwhile, the fear-gauge CBOE Volatility Index (VIX) jumped nearly 16% this month despite Monday's huge slump, indicating the rise in volatility level in markets. Against this backdrop, dividend ETFs may prove to be an ideal option for investors as dividend yields may protect one's portfolio from a slump in markets to some extent.
Uncertainty Regarding the Rate Hike Path
Easing rate hike speculations played a major role in boosting the major U.S. benchmarks on Monday. We note that increasing speculations had significantly weighed on markets for the most part of recent sessions. The U.S. stocks suffered their worst decline on Friday since U.K.'s decision to leave the European Union owing to the rising possibility of a rate hike in the near term. Hawkish comments from Boston Fed President Eric Rosengren cautioned that waiting too long for a rate hike might adversely affect some asset markets like commercial real estate.
However, markets made a significant rebound on Monday after some Fed officials hinted that the Fed may take a cautious approach before deciding on the rate hike. Since low unemployment rate has failed to boost inflation, Fed Governor Lael Brainard believes that "the case to tighten policy preemptively is less compelling." Meanwhile, Federal Reserve Bank of Atlanta President Dennis Lockhart said that the current economic scenario calls for a "serious discussion" about rate hike. He also mentioned that he didn't "feel that we are incurring the costs of patience that put a lot of urgency on the question of raising rates."
Inconsistent Oil Price Movement
The uncertainty in the energy markets has continued so far in 2016. Oil prices recovered from a 12-year low of $26.21 a barrel in February to $50/barrel mark in early June, slipped again to under $40 only to rally toward $50 once more. While a massive drop in crude inventories boosted the energy sector last Thursday, a rise in rig counts led the sector to decline on Friday.
As per the federal government's EIA report, oil inventories decreased by a massive 14.51 million barrels for the week ending September 2, the biggest decline in 17 years. However, U.S. rig counts rose for the third consecutive month in August, which had a negative impact on oil prices. Also, a rise in the U.S. dollar against major currencies owing to rate hike speculations also weighed on oil prices. Doubts over production freeze by major oil producers are also affecting the energy sector.
4 Dividend ETFs to Buy
In this uncertain scenario, dividend ETFs may emerge as one of the popular investment choices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis. Hence, investing in ETFs that maintain a portfolio of dividend paying stocks is likely to be a profitable option for investors. Moreover, choosing dividend ETFs that largely invest in domestic stocks may also protect one's portfolio from being affected by a sluggish global growth environment.
We have highlighted four domestically focused dividend ETFs that carry a Zacks ETF Rank #2 (Buy) with a Medium risk outlook and thus are poised to provide impressive returns in this uncertain environment.
SPDR Dividend ETF (NYSEARCA:SDY)
This popular choice in the dividend space provides exposure to the 109 U.S. stocks that have been consistently increasing their dividend annually for at least 25 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. The fund has the highest allocation to industrials currently while financials and consumer staples round out the top three. The fund has amassed about $14.4 billion in its asset base and trades in heavy volume of about 818,000 shares. Its expense ratio is 0.35% and it has an annual dividend yield of 2.42%. The ETF gained 2.6% and 14.7% over the three-month and year-to-date periods, respectively.
iShares Core High Dividend ETF (NYSEARCA:HDV)
This popular fund manages nearly $6.4 billion in its asset base. It provides exposure to a basket of 74 U.S. stocks that provides high dividend yield by tracking the Morningstar Dividend Yield Focus Index. The product sees impressive volume of about 512,000 shares and charges 12 bps in annual fees. The fund has the highest allocation to energy with 20.3% share, closely followed by consumer staples (19.7%) and health care (16.8%). The ETF gained 1.4% and 11.7% over the three-month and year-to-date periods, respectively. The fund has an annual dividend yield of 3.46%.
WisdomTree LargeCap Dividend ETF (NYSEARCA:DLN)
This product has an AUM of $1.9 billion and average daily volume of about 124,000 shares. This fund provides exposure to 290 large-cap dividend-paying stocks by tracking the WisdomTree LargeCap Dividend Index. Though the fund is slightly skewed toward the utilities sector with a 15% share, financials, information technology, energy, health care and industrials make up for a nice mix in the portfolio with a double-digit allocation each. The fund charges 28 bps in fees per year and yields 2.7% in annual dividend. The ETF gained 3.5% and 8.2% over the three-month and year-to-date periods, respectively.
First Trust Value Line Dividend ETF (NYSEARCA:FVD)
This popular fund manages nearly $2.4 billion in its asset base and provides exposure to a basket of 196 stocks that have the potential to pay above-average dividends by tracking the First Trust Value Line Dividend Index. The product sees impressive volume of about 563,000 shares and charges 70 bps in annual fees. The fund has the highest allocation to utilities with 22.8% share, closely followed by financials (16.8%) and industrials (12.6%). The ETF gained 2.5% and 13.2% over the three-month and year-to-date periods, respectively. The fund has an annual dividend yield of 2.14%.